Fortescue: First-Quarter Volumes Down Modestly but On Track

No-moat Fortescue FMG shipped about 46 million metric tons of iron ore in the first quarter of fiscal 2024. This was in line with our expectations but 3% below the same quarter of fiscal 2023 and 6% below the previous quarter. Shipments from its new 69%-owned Iron Bridge mine were immaterial. Fortescue’s average realized price was USD 100 per metric ton, up 14% on last year, driven by higher benchmark prices and a lower discount, which fell to 13% from 15%. With its generally lower-grade ore, around 57% to 58% iron content, Fortescue incurs a discount to the 62% benchmark price. Discounts tend to shrink when steelmaking margins contract, as has happened. Then steel mills act to minimize costs by using cheaper, lower-grade iron ore, rather than maximizing steel volumes by using higher-grade iron ore when steelmaking margins are high. Iron ore prices remain elevated on strong Chinese steel production.

We retain our fair value estimate of AUD 16 per share for Fortescue and continue to forecast sales of about 192 million metric tons (its share) in fiscal 2024, similar to last year. With Iron Bridge ramping up to full production, likely in fiscal 2026 or 2027, we forecast sales rising to about 210 million metric tons (its share) in fiscal 2028. The shares trade at 38% premium to fair value, which we think reflects current iron ore prices that remain elevated compared with the cost curve, as well as discounts for lower-quality ore that are low compared with historical averages. We also think the premium reflects enthusiasm around the company’s bold green energy ambitions. However, in our view, it is too early to get excited about green energy with commercially viable options not yet proved.

We continue to forecast fiscal 2024 unit costs of between USD 18 and USD 19 per metric ton for its existing operations—excluding Iron Bridge. Unit costs in the first quarter were at the bottom of that range and, similar to last year, helped by a weaker AUD/USD rate.